Sunday, May 3, 2009

Tony George gives the IRL a deadline

Indy Racing League founder Tony George dropped a bombshell in December when he told an industry group that he would shut down the open-wheel series if it didn’t break into the black soon.

When pressed about the possibility of being profitable by 2013, George responded, “It has to be, or or there won’t be a 2013. We expect a return on that investment.”

The remark before the Sports Business Journal Motorsports Marketing Forum in New York was scarcely reported outside racing circles and received virtually no attention from Indianapolis media.

Now racing analysts wonder what would happen to the fabled Indianapolis Motor Speedway if the IRL were to collapse.

“It’’s difficult to envision the Indianapolis 500 without a supporting series,” said Tim Frost, president of Frost Motorsports, a Chicago-based business consultancy. “I’m not sure any of us know what would happen if Tony George pulled the plug on the Indy Racing League. I can tell you, it wouldn’t be good.”

Most analysts are optimistic George will hit the goal and see the series thrive. Even Frost rates the IRL’s chances of reaching profitability within four years at around 70 percent—a figure other analysts agree is reasonable.

It’s been an uphill battle. Analysts estimate George has poured more than $250 million into the series in its 13 seasons. When asked in the New York forum if the league had turned a profit, George responded, “Not yet.”

IRL lieutenants are preparing for an all-out sales and marketing assault during one of the worst economic downturns since the Great Depression. The marketers are counting on last year’s unification with rival open-wheel series CART, and a three-year centennial celebration surrounding the Indianapolis Motor Speedway and Indianapolis 500 that starts this year, to rev the engine.

One thing is certain: Results of the campaign will profoundly affect open-wheel racing worldwide, not to mention in Indiana.

“We’re talking about tens of thousands of jobs and hundreds of millions of dollars in economic impact,” said Tom Weisenbach, Indiana Motorsports Association executive director. “We find new racing-related companies in Indiana every day.”

Post-IRL options

If the IRL doesn’t turn a profit in the next four years and George keeps his word, the Speedway would face interesting options. George, who is also IMS chairman, could maintain the Indianapolis 500 as a stand-alone open-wheel event, or make it part of an open-wheel series that starts in the wake of IRL’s death. Both options seem unlikely.

The other option would be to join Formula One. As strange as the idea might sound, the Indianapolis 500 was a fixture on the F1 calendar from 1950-60, though most of the drivers who raced here didn’t compete in many other F1 races.

“If the IRL went away, they wouldn’t have tumbleweeds blowing down the front stretch,” Frost said. “It’s just too much of a valued fixed asset to let sit during May.”

The Allstate 400 at the Brickyard NASCAR race and the MotoGP motorcycle race are thought to bring in a combined $35 million to $50 million in revenue, but motorsports analysts said those races don’t hold a candle to the revenue generated by the Indianapolis 500.

The Speedway doesn’t release the number, but ticket sales are just the tip of the iceberg. Whatever the number, it’s augmented by hospitality, merchandise and concession sales during almost the entire month of May, Frost said.

Progress and skepticism

While the IRL has gained some traction in the last year, skepticism abounds about its future.

“I’m not sure I’d bet they’ll be in the black within four years,” said Dennis McAlpine, a motorsports financial analyst based in New York.

However, Terry Angstadt, president of IRL’s Commercial Division, pointed out that the series has signed five major sponsors this year: Apex Brasil, Izod, Hot Wheels, Orbitz and The National Guard. The Apex, Izod and Hot Wheels deals now constitute three of the series’ five biggest sponsors, Angstadt said, along with Honda and Firestone.

Angstadt said there’s a 70-percent chance the league could sign a title sponsor for 2010. IRL officials hope for a deal worth at least $10 million a year.

Zak Brown, whose locally based motorsports marketing firm, Just Marketing International, has been hired by the league to hunt for title sponsors, said, “I think that deal could be enough to put the league at or very near profitability.”

While the current economic swoon has dramatically slowed the search for a title sponsor, Brown feels confident one will be signed well in advance of George’s ultimatum date.

“I’ll quit the sport if we don’t have a title sponsor by 2013,” said Brown, whose company represents several of the biggest sponsors in NASCAR and F1. “This series has too much going for it.”

Brown counts the drivers and their personalities, on-track competitiveness, racing venues and the Indianapolis 500 chief among the assets that will sustain the IRL.

Sponsorship growth isn’t the only thing pointing toward increased IRL revenue, Angstadt said. New races are another potential revenue source. He said venues in Houston; Cleveland; Birmingham, Ala.; Brazil and China are showing strong interest in the series.

Can Indy 500 save IRL?

Doug Boles, formerly a part owner of an IRL team, thinks the IRL is heading in the right direction, unlike its former rival, CART.

A bitter dispute with CART over the governance and direction of open-wheel racing led to the creation of the IRL in 1996. It didn’t take long for CART to suffer the consequences. The series, which was headquartered in Indianapolis and had roughly the same number of races the IRL does now, racked up as much as $143.3 million in annual expenses and made a profit only once in its last eight seasons.

CART hemorrhaged as the series bought TV time for its races, promoted its own races and subsidized teams. By 2003, losses had shot to a whopping $93.6 million.

“The Indy Racing League doesn’t pay to promote races, and has never had to buy TV time,” Boles said. “Tony George has made the decision to financially support some teams, but that is way down from years past.”

In contrast to CART’s TV deal, ESPN/ ABC paid the IRL $10 million annually for the right to air its races, motorsports business experts said. The IRL forged a new 10-year TV pact following last season, with Versus airing 12 races and ABC/ESPN carrying five races, including the Indianapolis 500. That contract is valued at slightly less than the previous deal, but far ahead of where CART was in its last few years.

Boles, who was director of motorsports development under former Mayor Steve Goldsmith, thinks the Indianapolis 500 will drive the IRL to profitability.

“In a bad year, the Indianapolis 500 brings in 50 percent more hospitality revenue than the Brickyard 400,” Boles said. “In a good year, it brings in two and a half times as much. That’s how big an event the Indianapolis 500 is.”

“You can make a pretty stout argument that it makes sense for Tony to lose money on the IRL,” Boles said. “With the IRL in place, Tony can go to bed at night knowing he’s going to have a product at the Speedway he controls, with no fiascos like you saw at the [2005] F1 race. It’s a loss leader to attract people to the store.”

Frost isn’t as sure.

He estimates the IRL’s annual expenses at $50 million to $70 million, not including the Indianapolis 500. “That’s a different animal altogether,” he said.

“It brings in a great deal of money, but it also carries significant operational expenses,” Frost said. Still, he said, $15 million to $25 million in profit from the month of May isn’t unreasonable.

One thing is certain. The Indianapolis 500 remains at the center of the debate about open-wheel racing. Most analysts agree the event remains the foundation on which the future of the sport rests.